Trade creation

Short description: Economic effect of customs unions

Part of a series on

World trade

Policy

* Import
* Export
* Balance of trade
* Trade law
* Trade pact
* Trade bloc
* Trade creation
* Trade diversion
* Export orientation
* Import substitution
* Trade finance
* Trade facilitation
* Trade route
* Domestic trade
* Tax

Restrictions

* Trade barriers
* Tariffs
* Non-tariff barriers
* Import quotas
* Tariff-rate quotas
* Import licenses
* Customs duties
* Export subsidies
* Technical barriers
* Bribery
* Exchange rate controls
* Embargo
* Safeguards
* Countervailing duties
* Anti-dumping duties
* Voluntary export restraints

History

* Mercantilism
* Protectionism
* Laissez-faire
* Free trade
* Economic nationalism
* Economic integration

Organizations

* International Monetary Fund
* International Trade Centre
* World Trade Organization
* World Customs Organization
* International Chamber of Commerce

Economic integration

* Preferential trading area
* Free-trade area
* Currency union
* Customs union
* Single market
* Economic union
* Fiscal union
* Customs and monetary union
* Economic and monetary union

Issues

* Intellectual property rights
* Smuggling
* Competition policy
* Government procurement
* Outsourcing
* Globalization
* Fair trade
* Trade justice
* Emissions trading
* Trade sanctions
* War
* Currency war
* Trade costs
* Trade war
* Trade and development

Lists

* Imports
* Exports
* Tariffs
* Largest consumer markets
* Leading trade partners

By country

* Trade mission
* Trading nation
* United States
* Argentina
* Pakistan
* Romania
* Vietnam
* India

Theory

* Comparative advantage
* Competitive advantage
* Heckscher–Ohlin model
* New trade theory
* Economic geography
* Intra-industry trade
* Gravity model of trade
* Ricardian trade theories
* Balassa–Samuelson effect
* Linder hypothesis
* Leontief paradox
* Lerner symmetry theorem
* Terms of trade

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Trade creation is an economic term related to international economics in which trade flows are redirected due to the formation of a free trade area or a customs union. The issue was firstly brought into discussion by Jacob Viner (1950), together with the trade diversion effect.[1][2]

In the former case after the formation of economic union, the cost of the goods considered is decreased, leading to an increase of efficiency of economic integration. Hence, trade creation's essence is in elimination of customs tariffs on inner border of unifying states (usually already trading with each other), causing further decrease of price of the goods,[3] while there may be a case of new trade flow creation of the goods between the states decided to economically integrate.

The opposite takes place in case of trade diversion, when the trade flow is diverted from actually cost-efficient partner state to less efficient one – but which became a member of economic union and made its goods cheaper within a union, but higher compared to the rest of the world. In practice, both trade creation and diversion effects take place due to formation of economic union. Efficiency of economic integration of specific union right now is assessed as a final outcome between trade creation and diversion effects: it is cost-effective in case of prevailing of the trade creation effects, and vice versa.

## Contents

* 1 Occurrence of trade creation
* 2 Downside of trade creation
* 3 See also
* 4 References
* 5 External links

## Occurrence of trade creation

When a customs union is formed, the member nations establish a free trade area amongst themselves and a common external tariff on non-member nations. As a result, the member nations establish greater trading ties between themselves now that protectionist barriers such as tariffs, import quotas, non-tariff barriers and subsidies have been eliminated. The result is an increase in trade among member nations in the good or service of each nation's comparative advantage. In other words, increase in trade causes greater revenues, (more profitable).

## Downside of trade creation

The creation of trade is important to the nation entering the customs union in that increased specialization may hurt other industries. Arguments for protectionism, such as the infant industry argument, national defense, outsourcing, and issues with health and safety regulations are brought to mind. However, customs unions are typically formed with friendly nations, eliminating the national defense argument.

## See also

* Trade diversion

## References

1. ↑ Viner, Jacob. Studies in the Theory of International Trade. https://cdn.mises.org/Studies in the Theory of International Trade_3.pdf.
2. ↑ "WTO | Publications - Preferential Trade Agreements, Trade Creation and Trade Diversion". https://www.wto.org/english/res_e/publications_e/wtr11_forum_e/wtr11_12july11_bis_e.htm.
3. ↑ "Trade Creation" (in en-GB). https://www.economicshelp.org/blog/glossary/trade-creation/.

## External links

* Regional Integration and Cooperation in Sub-Saharan Africa: Are Formal Trade Agreements the Right Strategy? \- this Harvard Institute for International Development discussion paper from 1997 argues that "[T]here is little reason to expect significant economic gains from formal trade agreements at this time. Such agreements, in and of themselves, are unlikely to yield appreciable benefits unless they are preceded by decisions within member countries to follow more general open trade strategies." It summarizes the conclusion of empirical research that there has been "little, if any, impact on intra-regional trade" (i.e. trade creation) from developing nation customs union formation. Many possible reasons are listed for the lack of trade creation evidence, given that developed nation customs unions do seem to have "stimulated increased trade and economic growth".

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